Gov't announces loan to save AIG

Tuesday, September 16, 2008

The Federal Reserve said that AIG's failure could hurt the economy. (AP Photo) (AP Photo)

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NEW YORK (KFSN) -- According to the New York Times, the Federal Reserve agreed to step in and help the company avoid bankruptcy, by loaning AIG $85 billion and taking an 80 percent stake in the firm.

AIG is neck deep in the mortgage crisis and teetering on the brink of collapse. Its stock fell 21 percent today, and another 30 percent in afterhours trading.

On Monday, the Federal Reserve was saying no bailout. It was drawing a line in the sand, saying, in essence, you created your problem -- now go fix it.

Now, it's all about the economy. By acquiescing, the fed is recognizing the financial crisis is making a recovery difficult.

Business faculty at the UC Berkeley Haas School of Business held a forum on the crisis today, and said it was no surprise that trouble was brewing.

As a result, the economy is in deeper trouble. It's Lehman Brothers and AIG this week.

Professor Dwight Jaffee raised a red flag, identifying the commercial real estate sector as the next shoe to drop.

Commercial mortgages, unlike homes, are mostly interest-only, five-year loans.

"Those property owners are not going to be able to refinance their mortgages," said Prof. Dwight Jaffee.

"In other words, credit is going to get tighter? Capital isn't there? They're going to run into a problem?" asked ABC7's David Louie.

"Oh, yeah. The person who made them that loan five years ago is now telling them they can't make that loan again," said Prof. Jaffee.

With credit tight, consumer spending in a slump, and housing values sliding the economy is in a deep trough.

James Wilcox is a former economist at the Federal Reserve and on the President's Council of Economic Advisors.

"We probably are in a recession. We're going to have some weak quarters ahead of us. It's not going to be one of the longest recessions, one of the deepest recessions that we've had. But in fact any recession can be painful," said Wilcox.

Not only that, the U.S. financial crisis is spreading overseas. We've seen the impact on European and Asian stock markets.

And U.S. exports, one of the few strengths in The U.S. economy, even that is threatened.

Sean Randolph is the director of the Bay Area Council's Economic Institute.

"If their economies slow down as our economy is slowing down, then they're naturally going to be importing less. It's just a matter of they'll have less money to spend. They'll be more conservative," said Randolph.

But we're learning that even though the Federal Reserve's main focus has been on keeping inflation in check, it's also concerned about financial institutions that could inflict more damage.

The Federal Reserve's deal involves an $85 billion and it's technically a line of credit that will stand over two years. The money will come from the Federal Reserve Bank of New York, and AIG will be allowed to sell some of its business units in order to raise money.

Most importantly, the U.S. government will have the right to veto a payment of dividends to common and to preferred shareholders of AIG. This is very unusual because AIG and its subsidiary company are regulated by state agencies.

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